UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 3, 2005
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-26137
drugstore.com, inc.
(Exact name of registrant as specified in its charter)
| Delaware | 04-3416255 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
411 108th Avenue NE, Suite 1400, Bellevue, Washington 98004
(Address of principal executive offices including zip code)
(425) 372-3200
(Registrant’s telephone number, including area code)
13920 SE Eastgate Way, Suite 300, Bellevue, Washington 98005
(Former Address, if Changed since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨.
As of May 6, 2005, the registrant had 92,021,937 shares of common stock outstanding.
DRUGSTORE.COM, INC.
FORM 10-Q
For the three months ended April 3, 2005
| Page | ||||
| PART I. FINANCIAL INFORMATION |
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| Item 1. |
3 | |||
| 3 | ||||
| 4 | ||||
| 5 | ||||
| 6 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 | ||
| Item 3. |
25 | |||
| Item 4. |
25 | |||
| PART II. OTHER INFORMATION |
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| Item 1. |
26 | |||
| Item 2. |
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
26 | ||
| Item 3. |
26 | |||
| Item 4. |
26 | |||
| Item 5. |
26 | |||
| Item 6. |
27 | |||
| 28 | ||||
| Certifications |
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2
PART I—FINANCIAL INFORMATION
| Item 1. | Financial Statements |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
| Three Months Ended |
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| April 3, 2005 |
March 28, 2004 |
|||||||
| Net sales |
$ | 99,573 | $ | 84,362 | ||||
| Costs and expenses: |
||||||||
| Cost of sales |
79,336 | 66,245 | ||||||
| Fulfillment and order processing |
10,285 | 9,257 | ||||||
| Marketing and sales |
6,820 | 6,123 | ||||||
| Technology and content |
2,928 | 2,320 | ||||||
| General and administrative |
3,728 | 3,663 | ||||||
| Amortization of intangible assets |
801 | 1,052 | ||||||
| Stock-based compensation (1) |
848 | 352 | ||||||
| Total costs and expenses |
104,746 | 89,012 | ||||||
| Operating loss |
(5,173 | ) | (4,650 | ) | ||||
| Interest income, net |
179 | 81 | ||||||
| Net loss |
$ | (4,994 | ) | $ | (4,569 | ) | ||
| Basic and diluted net loss per share |
$ | (0.06 | ) | $ | (0.06 | ) | ||
| Weighted average shares outstanding used to compute basic and diluted net loss per share |
85,487,764 | 74,515,424 | ||||||
| (1) | Set forth below are the amounts of stock-based compensation that, if recorded by operating function, would be classified in the Statements of Operations as follows: |
| Fulfillment and order processing |
$ | — | $ | 17 | ||
| Marketing and sales |
143 | 60 | ||||
| Technology and content |
4 | 20 | ||||
| General and administrative |
701 | 255 | ||||
| Total |
$ | 848 | $ | 352 | ||
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| April 3, 2005 |
January 2, 2005 |
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| (unaudited) | (Note 2) | |||||||
| Assets | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 15,367 | $ | 15,491 | ||||
| Marketable securities |
42,111 | 18,728 | ||||||
| Accounts receivable, net of allowances |
33,435 | 35,344 | ||||||
| Inventories |
21,118 | 19,287 | ||||||
| Prepaid marketing expenses |
2,290 | 2,290 | ||||||
| Other current assets |
3,306 | 3,027 | ||||||
| Total current assets |
117,627 | 94,167 | ||||||
| Fixed assets, net |
13,716 | 13,626 | ||||||
| Other intangible assets, net |
9,598 | 10,399 | ||||||
| Goodwill, net |
32,202 | 32,202 | ||||||
| Prepaid marketing expenses and other |
7,545 | 8,117 | ||||||
| Total assets |
$ | 180,688 | $ | 158,511 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 57,441 | $ | 57,510 | ||||
| Accrued compensation |
2,837 | 3,559 | ||||||
| Accrued marketing expenses |
2,797 | 2,567 | ||||||
| Other current liabilities |
3,958 | 3,837 | ||||||
| Current portion of long-term debt |
2,196 | 1,158 | ||||||
| Total current liabilities |
69,229 | 68,631 | ||||||
| Deferred income taxes |
945 | 945 | ||||||
| Long-term debt, less current portion |
1,388 | 1,807 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, $.0001 par value, 10,000,000 shares authorized, no shares issued and outstanding |
— | — | ||||||
| Common stock, $.0001 par value, stated at amounts paid in: |
833,433 | 807,142 | ||||||
| Deferred stock-based compensation |
(2,862 | ) | (3,598 | ) | ||||
| Other comprehensive loss |
(35 | ) | — | |||||
| Accumulated deficit |
(721,410 | ) | (716,416 | ) | ||||
| Total stockholders’ equity |
109,126 | 87,128 | ||||||
| Total liabilities and stockholders’ equity |
$ | 180,688 | $ | 158,511 | ||||
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Three Months Ended |
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| April 3, 2005 |
March 28, 2004 |
|||||||
| Operating Activities: |
||||||||
| Net loss |
$ | (4,994 | ) | $ | (4,569 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation |
1,603 | 1,713 | ||||||
| Amortization of marketing and sales agreements |
572 | 572 | ||||||
| Amortization of intangible assets |
801 | 1,052 | ||||||
| Stock-based compensation |
848 | 352 | ||||||
| Other |
(34 | ) | 24 | |||||
| Changes in: |
||||||||
| Accounts receivable |
1,909 | (2,961 | ) | |||||
| Inventories |
(1,831 | ) | (998 | ) | ||||
| Prepaid marketing expenses and other current assets |
(279 | ) | (493 | ) | ||||
| Accounts payable, accrued expenses, and other liabilities |
(440 | ) | 867 | |||||
| Net cash used in operating activities |
(1,845 | ) | (4,441 | ) | ||||
| Investing Activities: |
||||||||
| Purchases of marketable securities |
(30,209 | ) | (2,247 | ) | ||||
| Sales and maturities of marketable securities |
6,825 | 7,575 | ||||||
| Purchase of fixed assets |
(1,693 | ) | (766 | ) | ||||
| Net cash (used in) provided by investing activities |
(25,077 | ) | 4,562 | |||||
| Financing Activities: |
||||||||
| Proceeds from exercise of stock options and employee stock purchase plan |
229 | 1,169 | ||||||
| Proceeds from private placement financing, net of issuance costs |
25,950 | — | ||||||
| Borrowings under revolving line of credit |
1,000 | — | ||||||
| Principal payments on long-term debt |
(381 | ) | (184 | ) | ||||
| Net cash provided by financing activities |
26,798 | 985 | ||||||
| Net (decrease) increase in cash and cash equivalents |
(124 | ) | 1,106 | |||||
| Cash and cash equivalents at beginning of period |
15,491 | 7,035 | ||||||
| Cash and cash equivalents at end of period |
$ | 15,367 | $ | 8,141 | ||||
| Supplemental Disclosure of Cash Flow Information: |
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| Cash paid during the period for : |
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| Interest |
$ | 54 | $ | 24 | ||||
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| 1. | Description of the Business |
drugstore.com, inc. is a leading online provider of health, beauty, vision and pharmacy solutions. We sell health, beauty, wellness, personal care, sexual well-being, and pharmacy products through our website at www.drugstore.com and prestige beauty products through www.beauty.com, which is also accessible through the drugstore.com website. We offer customized nutritional supplement programs through our wholly owned subsidiary, Custom Nutrition Services, Inc. (CNS), through websites located at www.DrWeilVitaminAdvisor.com, www.zoneprofiler.com and www.pritikin@home.com. We sell contact lenses through our wholly owned subsidiary International Vision Direct Corp. and its subsidiaries (collectively, Vision Direct), through websites located at www.visiondirect.com, www.lensmart.com and www.lensquest.com. Our customers are located primarily in the United States of America and Canada, but our products are available to consumers worldwide.
All customer orders are processed through our websites or via telephone through our toll-free telephone numbers, 1-800-DRUGSTORE and 1-800-VISIONDIRECT. We operate two distribution centers, one approximately 290,000 square foot facility that provides fulfillment capabilities for all of our pharmaceutical and non-pharmaceutical orders delivered by mail, and another approximately 17,000 square foot facility that fulfills our vision orders delivered by mail. Under the terms of an agreement with Rite Aid Corporation (Rite Aid), customers are also able to order existing drugstore.com and Rite Aid refill prescriptions for pickup at any Rite Aid store.
| 2. | Basis of Presentation and Principles of Consolidation |
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC). These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC for interim financial reporting. These condensed consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the condensed consolidated balance sheets, statements of operating results, and statements of cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending January 1, 2006 or any other interim period due to seasonal and other factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. The balance sheet at January 2, 2005 has been derived from audited financial statements at that date but does not include disclosures required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the fiscal year ended January 2, 2005.
We operate using a 52/53-week retail calendar year, with each of the fiscal quarters in a 52-week fiscal year representing a 13-week period. Fiscal year 2005 is a 52-week year and fiscal year 2004 was a 53-week year, with the fourth quarter of 2004 representing a 14-week period.
The accompanying condensed consolidated financial statements include those of drugstore.com, inc. and our subsidiaries. All material intercompany transactions and balances have been eliminated.
| 3. | Significant Accounting Policies |
Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
6
New Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (FAS 123R), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (FAS 123). FAS 123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and amends SFAS No. 95, Statement of Cash Flows. FAS 123R applies to all stock-based compensation transactions in which a company acquires services by (a) issuing its stock or other equity instruments, except through arrangements resulting from employee stock-ownership plans, or (b) incurring liabilities that are based on the company’s stock price. FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized as an expense in a company’s financial statements based on their fair values at the date of grant. On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payments (SAB 107), which expresses the SEC’s views on FAS 123R, including but not limited to applying share-based payments to non-employees, valuation methods, classification of compensation expense and accounting for income tax effects. FAS 123R is effective for public companies no later than the beginning of the fiscal year beginning after June 15, 2005, and we will adopt it effective for the first quarter of 2006. FAS 123R permits public companies to adopt its requirements using either the modified-prospective method or the modified-retrospective method. We are currently evaluating these methods and have not yet determined which method we will adopt.
As permitted by FAS 123, we currently account for share-based payments to employees using the intrinsic value method under APB 25. As a result, we recognize no compensation expense for employee stock options, except for options granted with an exercise price lower than the market price on the date of grant. The adoption of FAS 123R’s fair value method will require us to recognize compensation expense for employee stock options and other share-based payments to employees, based on their fair market value on the date of grant. This will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The magnitude of the impact of the adoption of FAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted FAS 123R in prior periods, the impact of that standard would have approximated the impact of FAS 123 as described in the disclosure of adjusted net loss and loss per share set forth in Note 7 of the accompanying condensed consolidated financial statements (Stock-Based Compensation).
Reclassifications
Certain amounts included in the condensed consolidated statement of cash flows for the three months ended March 28, 2004 have been reclassified to conform to the current quarter presentation. Reclassifications include a decrease to purchases of marketable securities of $9.5 million and a decrease to sales of marketable securities of $11.2 million, resulting in a decrease to net cash used in investing activities of $1.7 million. Reclassifications were made to reflect only the sale and purchase activity related to marketable securities and excludes activity related to cash equivalents, and changes in reclassifications between cash, cash equivalents and marketable securities. The reclassifications did not impact our results of operations or financial position.
| 4. | Cash, Cash Equivalents and Marketable Securities |
Cash, cash equivalents and marketable securities consisted of the following as of April 3, 2005 and January 2, 2005 (in thousands):
| April 3, 2005 | |||||||||||||
| Amortized Cost |
Gross Unrealized Holding Gains |
Gross Unrealized Holding Losses (1) |
Fair Value | ||||||||||
| Cash |
$ | 11,369 | $ | — | $ | — | $ | 11,369 | |||||
| Commercial paper |
3,998 | — | — | 3,998 | |||||||||
| Cash and cash equivalents |
15,367 | — | — | </ | |||||||||